Good day, ladies and gentlemen. Welcome to the CAE Q4 conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.
Thank you. Good afternoon, everyone. Thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal 2021 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, May 22, 2020, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially. Listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and with the U.S. Securities and Exchange Commission on EDGAR.
On the call with me this afternoon are Marc Parent, he's President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc.
Thank you, Andrew. Good afternoon to everyone joining us on the call. I'll first discuss some highlights of the quarter and the year, and then Sonya will review the detailed financials and outline some of the measures that we've put in place to protect our financial position and preserve liquidity in the face of the pandemic. I'll come back at the end of the presentation to comment on our outlook. We were leading CAE to what would have been another record year when the COVID-19 pandemic hit, and unfortunately, it impacted us during what is normally our strongest quarter. More importantly is the risk this suddenly posed to people's well-being, and our first response was naturally to ensure the health and safety of our employees and our customers, and this continues to be our top priority.
We wasted no time assembling a COVID-19 pandemic task force, putting our business continuity plans in place. I'm extremely proud of CAE's employees worldwide who daily, through even the most extreme conditions, take to heart the continuity of our customers' most critical operations and earn the privilege of being their training partner of choice. What makes me even more proud is the way our employees went beyond the call of duty in the fight against COVID-19 by bringing forward the idea to develop a critical care ventilator. It took just 11 days for 12 CAE engineers and scientists to develop a prototype. Now some more than 500 CAE employees are delivering on a contract with the Government of Canada to manufacture 10,000 ventilators to help save lives. The CAE Air1 ventilator, as we've called it, is in the final stages of certification by the health authorities.
We're in the business of safety after all, this humanitarian gesture is a true testament to the kind of social impact that CAE and its employees have. It also underscores the company's agility and our culture of innovation. Turning to our results. Notwithstanding COVID-19 impacting us during our biggest quarter, we still had a strong performance overall in fiscal 2020, with double-digit revenue growth, 21% operating income growth, and 7% higher earnings per share. I'm especially pleased with our 98% conversion of net income to free cash flow, which underscores the cash generative profile of CAE's world-leading training solutions. In Civil, we exceeded our annual outlook with 37% operating income and annual orders totaling CAD 2.5 billion, including additional airline training outsourcing and 49 full-flight simulator sales. Civil finished the year with a record backlog of CAD 5.3 billion.
Again this year, we delivered more than 1 million hours of training, underscoring CAE's position as the largest civil aviation training company in the world. In the Q4 , specifically, Civil booked orders for CAD 469 million, including the sale of 12 full-flight simulators. Civil saw a significant decrease in training services demand as a result of the reduction in airline and business aircraft operations globally and the disruption to the global air transportation environment itself. In addition to much lower demand, travel restrictions and local self-isolation measures worldwide resulted in several civil aviation training location closures. By the end of the March quarter, 19 of our over 60 training locations had suspended operations, and a further 10 locations began operating at significantly reduced capacity.
In addition to disruptions to our global training network, we also had to suspend the installation and delivery of civil simulator products, and under local public directives, our Montreal manufacturing plant suspended manufacturing of civil simulators during the last week of March. Despite these disruptions, we still managed to deliver an otherwise impressive 56 civil full-flight simulators for the year. In Defense, we expected a strong Q4 in order to reach our annual outlook for modest growth. It too was impacted by the pandemic. We achieved modest revenue growth, but we came up short on operating income, which was down 13%, mainly on lower-than-expected progress on program milestones and delays securing new orders. A range of programs with Defense and OEM customers globally saw project advancement delays due to travel bans, client access restrictions, and supply chain restrictions and disruptions.
We had delays to contract awards as government acquisition authorities followed directives in their respective countries to shelter in place and eliminate travel. In the Middle East, the new realities brought about by the pandemic and low oil price has led work on certain programs to be halted and new contract awards to move to the right, with customers focused on their new fiscal realities and mitigating the pandemic itself. Despite these headwinds, we still booked CAD 1.2 billion of orders during the year for a CAD 4.1 billion defense backlog, which gives CAE an additional measure of diversification. Key wins included a contract for KC-135 aircrew training services and simulator upgrades for the United States Air Force, and a contract to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter, and to upgrade and modify the German Army's NH90 full mission simulators.
For the quarter, we received Defense orders and contract options totaling CAD 277 million. Notable wins included a contract with Leonardo to provide M-346 training devices and upgrades, an order from BAE Systems to supply our CAE Medallion E-Series visual system, an order from Babcock France to provide a Pilatus PC-21 full mission simulator for the French Air Force. Finally, in healthcare, we were tracking expectations for double-digit annual revenue growth when it too was negatively affected by COVID-19 as medical and nursing school customers came under lockdown protocols and hospital customers focused attention on the healthcare crisis. CAE Healthcare did, however, succeed to bolster its position during the year as the innovation leader in simulation-based healthcare education and training. It won the EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for healthcare's emergency care mannequin.
Healthcare also launched innovative products, including new anesthesia SimSTAT modules, screen-based simulation approved by the American Board of Anesthesiology for maintenance of certification credits, and multiple custom simulators for OEMs and leading medical device companies, including Baylis Medical and Edwards Lifesciences. On the humanitarian front, in addition to our ventilator initiatives, our Healthcare provided complimentary training seminars on how to prepare healthcare workers in the fight against COVID-19. We also launched simulation-based training solutions to train personnel in the safe practice of ventilation and intubation, which is key to saving lives. Additionally, we leveraged our global supply chain to supply some 600,000 N95 masks to the Quebec and Manitoba governments in support of frontline health workers. With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook.
Sonya?
Thank you, Marc, and good afternoon, everyone. In view of the pandemic-related challenges ahead, we implemented several flexible measures to protect our financial position and preserve liquidity, including a significant reduction of capital expenditures. Our current expectation is for approximately CAD 50 million of CapEx deployed in the H1 of the fiscal year, and we will assess the level of deployment as market conditions develop. We are also significantly reducing R&D investments, and we have introduced strict cost containment measures, salary freezes, salary reductions, reduced workweeks, and approximately 2,600 temporary layoffs. We have since been able to recall approximately 1,500 temporarily laid-off employees in Canada through the Canada Emergency Wage Subsidy program, for which we must qualify on a monthly basis. We have also accessed and are working to access government support programs in other countries where we operate.
Other cash preservation measures we introduced include a suspension of our common share dividend and share repurchase plan. Additionally, we are working with our defense customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work scope and working with suppliers for optimal payment terms. CAE's training operations are inherently highly cash generative. However, the combination of sharply lower demand and the COVID-19 related disruptions to our operations are expected to result in negative free cash flow in the H1 of the fiscal year. Adding to this, we normally see an increase in non-cash working capital investments in the H1 . I would add that while collections are timely with defense customers, we expect collections to be slower with civil customers.
Based on our current view, we expect to generate positive free cash flow in the H2 as markets begin to inflect more positively. Looking at our results, consolidated revenue for the Q4 was down 4% to CAD 977.3 million. Quarterly net income before specific items was CAD 122.3 million or CAD 0.46 per share, which is also down 4% compared to CAD 0.48 in the Q4 last year. As Marc noted, COVID-19 began to negatively impact our results during our biggest quarter. On average, we typically generate upwards of 20% of our annual operating income in the month of March alone. For the year, consolidated revenue was up 10% to CAD 3.6 billion, and segment operating income before specific items was up 21% to CAD 590.4 million. Annual net income before specific items was CAD 359.7 million, or CAD 1.34 per share, which is up 7% compared to CAD 1.25 last year.
Specific items in fiscal 2019 include the cost from the acquisition and integration of Bombardier's BAT business. Specific items in fiscal 2020 also includes the impacts of Defense and Security's reorganizational costs and the impacts of a goodwill impairment charge recognized in healthcare. We generated CAD 185.1 million of free cash flow in the quarter, and CAD 351.2 million for the year, for an annual cash conversion rate of 98%, which is right in line with our annual average conversion target of 100%. During the year, we generated higher earnings, which converted into higher cash provided by operating activities, which more than offset our higher investment in non-cash working capital. Uses of cash involved funding capital expenditures for CAD 84 million in the Q4 and CAD 283.4 million for the year, mainly for the deployment of new simulators to our global training network in support of customer-led growth opportunities.
Other uses of cash included the distribution of CAD 110.9 million in dividends for the year. We repurchased and canceled approximately 1.5 million common shares under the NCIB program during the year for another CAD 49.6 million. In all, between dividends and share buybacks, CAE returned CAD 160.5 million to shareholders during fiscal 2020. Looking at capital returns, return on capital employed before specific items and excluding the impact of IFRS 16 was 10.9% compared to 11.6% last quarter and 12.9% last year. Net debt was CAD 2.4 billion at the end of March for a net debt to total capital ratio of 47.8%. This compares to CAD 1.9 billion or 43.9% of total capital at the end of last year. Since we adopted IFRS effective April 1, 2019, net debt also includes the obligations under capital leases which were previously accounted for as operating leases, therefore not included in debt.
Excluding this impact, the net debt to capital ratio would have been 44.2% this quarter. Subsequent to year-end, we concluded a new two-year, CAD 500 million senior unsecured revolving credit facility and expanded our receivable purchase program from $300 million U.S. to $400 million U.S. These transactions provide us access to additional liquidity and further strengthen our financial position. All told, between cash and available credit, we have upwards of CAD 2 billion of liquidity, which we believe in addition to the cash we expect to generate from operations, is a solid position to manage through the period ahead. Income taxes this quarter were CAD 26.9 million, representing an effective tax rate of 25%, compared to 13% for the Q4 of fiscal 2019.
The tax rate in the Q4 last year would have been 20% before certain elements, and in the Q4 this year, the income tax rate before the goodwill impairment charge for healthcare would have been comparable 19%. Turning to our segmented performance. In Civil, Q4 revenue was up 1% year-over-year to CAD 601.9 million. Operating income before specific items was up 26% to CAD 153.6 million for a margin of 25.5%. For the year, Civil revenue was up 16% to CAD 2.2 billion, and operating income before specific items was up 37% to CAD 479.4 million for an annual margin of 22.1%. Double-digit organic growth and the successful integration of the Bombardier BAT business contributed to these record Civil results, notwithstanding the pandemic impact. The Civil book-to-sales ratio for the quarter was 0.78x and for the year was 1.14x .
In Defense, Q4 revenue of CAD 341.8 million was down 12% over Q4 of last year. Operating income before specific items was down 21% to CAD 40.2 million for an operating margin of 11.8%. For the year, Defense revenue was up 2% to CAD 1.3 billion. Operating income before specific items was down 13% to CAD 114.5 million, representing a margin of 8.6%. The Defense book-to-sales ratio for the quarter was 0.81 times, for the year was 0.92x . In Healthcare, Q4 revenue was CAD 33.6 million, down 17% from CAD 40.7 million in Q4 last year. Operating income before specific items was CAD 0.1 million in the quarter, compared to CAD 4.2 million in Q4 of last year.
For the year, Healthcare revenue was CAD 124 million, up from CAD 121.6 million, and segment operating loss before specific items was CAD 3.5 million, representing a decrease of CAD 8.3 million compared to a segment operating income of CAD 4.8 million last year. The lower operating income was mainly because of the negative impact on COVID-19, which took us off our double-digit top-line growth trajectory. Also in Healthcare, we recorded an impairment charge of CAD 37.5 million relating to goodwill after considering the general economic conditions and performance, and specifically the deterioration in the global economic environment from uncertainties of COVID-19 pandemic as part of our annual goodwill review. With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. The COVID-19 pandemic is a crisis of obviously unprecedented speed and magnitude with respect to the disruption it's caused to our daily lives. The global air transportation environment and air passenger travel have been hit especially hard with a vast proportion of the global commercial and business jet fleets grounded. According to IATA's latest forecast, commercial passenger traffic is expected to be down nearly 50% this year. Compounding this already dramatic situation is the material disruption to CAE's operations that we continue to experience. We face this pandemic, however, from a position of strength with a global leading market position, a balanced business with recurring revenue streams, and a solid financial position. We've taken decisive yet flexible actions to help to protect our people and operations and to give us the necessary agility to resume long-term growth when the pandemic is behind us.
We realize it may take some time before things get back to normal. In the meantime, we're managing the things we can control, and we're continuing to identify opportunities for cost savings that we expect to endure long after COVID-19 has passed. In keeping with the notion of hoping for the best and planning for the worst, we're confident in the precautionary measures we're taking and that we have the liquidity to weather the storm. The global leadership team and I have monitored the daily evolution of the pandemic to evaluate the measures being put in place by local and national governments and the resulting impact on the company, and to implement necessary contingency plans in real time as the situation unfolds. So far, the processes that we've put in place to manage through the pandemic are running smoothly and are effective.
We remain focused on protecting the employees' health and safety, supporting our customers' critical operations, and ensuring business continuity. At the same time, the management team and I are looking forward to the future and are already envisioning what the post-COVID-19 era will be like. More specifically, we're imagining how it will be different and what kind of expanded role that CAE is likely to play. There's still much uncertainty with respect to the duration and severity of the market downturn. We do know that global air travel will eventually return, and that training will continue to be essential. We don't expect a quick market rebound, but we don't need to see a complete market recovery to be highly successful in the period following the pandemic.
The ability to continue to find growth in that context will define great companies, and I have every confidence that CAE, the global leader in training, is such a great company. We're continuing to invest in innovation to enhance our customers' experience. As the industry's thought leader, we're leading the way to modernize the very fundamentals of training in civil, defense, and healthcare. For this reason, I have recently appointed a new member to our executive team, Heidi Wood, as CAE's Executive Vice President, Business Development and Growth Initiatives. I created this role specifically to put focus on partnering with our business unit leaders to identify and drive new avenues of growth across the company, maximize synergies across the businesses, and drive our entry to adjacencies and leverage artificial intelligence and digital technologies.
The long-term outlook for the company remains compelling with increased potential for long-term partnerships and outsourcing, and a resumption of above-market rates of growth. In the short term, however, we expect the pandemic to have a significantly negative impact on our performance. As we look to the year ahead, we believe it'll be a tale of two halves, with the H1 of the year defined by sharply lower demand and major disruptions to our operations. For the H2 of the year, we expect performance to potentially be more positive as markets begin to reopen and travel restrictions ease. For the year overall, we expect a material decrease in operational and financial performance, and given the lack of specific visibility, we're going to refrain from providing our customary growth guidance for the fiscal year.
Looking specifically at civil, currently, eight of our over 60 civil aviation training locations have suspended operations, and 17 are operating at significantly reduced capacity. These statistics change on a nearly daily basis as local restrictions continue to evolve. The Montreal manufacturing plant, which suspended manufacturing operations for civil simulator products on March 25th, is now gradually ramping up operations. In terms of backlog so far, we've only received one full-flight simulator order cancellation from a small third-party training company, and we've received several requests from airlines for deferrals. Demand for new civil full-flight simulators is closely linked to new aircraft deliveries, which, according to the aircraft OEMs, are expected to be down significantly. While the total market will undoubtedly be much smaller this fiscal year, we expect to maintain our leading share of the available simulator sales.
When air travel eventually resumes, we expect to continue building on our previously positive momentum in training, increasing market share, and securing new customer partnerships with our innovative training solutions. In the meanwhile, it's important to distinguish that civil aviation training is highly regulated, and for the pilots to remain active, they must train at a minimum frequency of every six- nine months just to keep their certifications. While airlines globally have suspended the operation of the majority of the commercial fleet, this doesn't imply a proportionate impact on training demand. Dispensations have been given in major jurisdictions, including Europe and North America, to extend the deadline of various time-bound training obligations to compensate for travel restrictions and border closures. However, these training requirements will ultimately need to be fulfilled for pilots to retain their licenses and resume flight duty.
Looking beyond that, we're confident that CAE will increasingly be part of the solution going forward, and that more airline training partnerships and outsourcing opportunities could materialize as the industry looks for ways to gain greater agility and resiliency in the post-COVID-19 era. In business aviation, while growth-driven training demand is also being negatively affected, our business is largely based on servicing the regulated training needs of the already active global business aircraft fleet and the delivery of large-cabin business jets. In Defense, we benefit from a large backlog of contracts with government customers to provide training solutions and operational support services that are considered essential to national security. To that extent, our training and support services and manufacturing operations should continue to be relatively unaffected by COVID-19 travel-related restrictions.
Our Defense and Security business has been under new leadership since February, when we appointed Todd Probert as its Group President, and he has been in the process of bolstering operational efficiencies and effectiveness and expanding its addressable market. In the short term, COVID-19-related issues are expected to continue to complicate our efforts towards reaching program milestones on product programs, including some of our most complex contracts in our backlog. The COVID-19 impact on order flow should ultimately abate as restrictions are eased. The additional realities of a low oil price environment in the Middle East will likely cause expected contracts in that region to continue to move to the right. That being said, we continue to see good bidding opportunities overall, with over CAD 3.6 billion of current bids and proposals submitted and pending decisions by customers.
Beyond the current year, the long-term outlook for defense continues to be for growth, supported by a large addressable market for our innovative training and mission support solutions and the realization of the benefits of our new leadership and bolstered organization. Finally, in healthcare, we think the business looks well-positioned to experience a change in the appreciation of the importance, relevancy, and benefits of healthcare simulation and training to help save lives at a steady state and in a healthcare crisis. With its innovative products and demonstrated agility, we're confident that healthcare will become a more material part of the company over the long term. In summary, we're going through a very challenging period in CAE's history, and our performance will reflect that reality in the current fiscal year.
We've taken the most appropriate measures to protect the interests of the company, its employees, and all of our stakeholders. The fundamentals of CAE remain solid with our global leadership position, high degree of recurring business in regulated markets, and balanced business across markets and geographies. CAE is a highly innovative company with over seven decades of industry firsts under its belt. At the same time, as we manage through this pandemic, we're focused on the future, and I expect we'll be ultimately stronger for it. Before we conclude, I'd like to welcome General David Perkins to the CAE Board of Directors. General Perkins served in the United States Army for over 40 years and commanded at all levels, including Major Army Command at the four-star level.
His career culminated as the Commander of the United States Army Training and Doctrine Command, where he led the Army's concept of multi-domain operations, which has become a driver for future changes in operations and training. We're very fortunate to have someone of General Perkins' profile on the CAE board, we look forward to his strategic counsel as we navigate the way forward. With that, I thank you for your attention, we're now ready to answer your questions.
Thanks, Marc. Operator, we'll now be happy to open the lines to members of the financial community who may have questions.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for our first question. Our first question comes from the line of Fadi Chamoun with BMO. You may proceed with your question.
Okay. Thank you, and good afternoon, everyone.
Afternoon.
I'm looking at your civil aviation segment. You've improved the operating margin quite substantially this year versus the prior year, although utilization went from 76%- 70%, which is, I guess, good news. I'm just trying to understand the path forward for this utilization rate. You're probably going through the bottom in that utilization rate right now. If you can share with us, where are you bottoming out? If you can share with us what is a break-even level for utilization rate for this business as we move into the next six- 12 months?
Well, I think I can start that and maybe shift it over to Sonya, Fadi. Look, I think you're right. In terms of seeing a bottom, I think we've seen it. I'm pretty confident of that. That bottom is pretty bottom, right? In the month of April, we hit about 20% utilization. When you think about it, that's pretty understandable, because not only was 90% of the fleet of commercial airliners grounded across the world, you also had the fact that even if people wanted to train, a lot of cases, they couldn't get to the training centers because either training center was closed because of local quarantine rules. If you take the example of the travel restrictions internationally, even in some cases across states, across certainly north, south here in Canada. I think we've seen that bottom, and yes, it is.
The good news is that as we fully expect, we don't get to zero because we're a regulated business in any kind of circumstance. If you look in basically business aircraft, they're the same kind of situation. In reality, even though you would've seen a demand for business aircraft, but in reality, you just couldn't get anywhere because you literally couldn't flight plan in some cases, even across states. Look, I think we've seen that bottom. We have been starting to see the recovery. I say it's a tepid recovery at best because the airlines aren't flying that much more yet. We see as people are able to get into training, we're seeing more training activity. I would tell you at the moment, we're hovering anywhere between 25% and 30% right now. It has been a slow, steady curve up in the last three, four weeks.
That's what we've seen. At the same time, I fully expect that that's going to continue because as I said in my briefing, my remark, we still have a number of our training centers are closed, and a lot of them are still operating on limited utilization. You also have the situation that, as I mentioned in my notes as well, that for the same reason that because of the travel restrictions, pilots that would have otherwise needed to conduct recurrent training because they were running into their six or nine months expiry of their certification, just physically couldn't get to the training center. You saw FAA, you saw EASA providing a delay and if you like, a dispensation of that. It's obviously not replacing. You still have to do it, but it extended it by three months. That's coming to an end.
We're seeing a pickup, and we expect a further pickup of that activity. I think going forward, when we look at utilization going forward, we base it, first of all, on the fact that, long answer to your question here, but I think it's maybe setting the tone that, air travel is going to come back. Principle of air travel remain unchanged. Humans have the desire, the ability to travel, and the fact that it's been temporarily suspended, I think the key word there is temporary. Air travel is still the closest thing to a time machine that's been invented, and humans will insist on their right to fly. We already start seeing that in pockets around the world. Recovery will happen. For us, it's just a question of time. We certainly think we've seen the worst.
We're using IATA's forecast for long-term planning purposes. That's how we've set our expectations for the year, where we talk about a tale of two halves. We fully expect that this recovery is probably, people say V-shape, well, it's not going to be V-shape. We're pretty sure of that. We're basically assuming like probably a sawtooth U-recovery, because I think it's realistic to expect based on all the expertise you see out there that you may see a resurgence in the fall, and you might see some hotspots in the world. There's still some debate whether or not this is seasonal and whether or not if that's the case, that affects us maybe in the fall or the winter, but the south of the equator, they're going to be turning to winter months in the coming months. Maybe there's a resurgence there.
We're fully expecting and banking that into our forecast. For us, I think that we will see an increase in utilization as we go forward. We don't need all of that utilization to come back to do well. I think you started saying in your comment there that we achieved pretty good margins, like about 25% on our civil network based on lower overall utilization. Some of that is mixed. The revenue comes from different sources, but in large part, it's trains. The fact that we were able to do that at much lower levels of utilization tells you a couple of things. One is the impact of, for example, business aviation, the acquisition that we did last year, largest in our history of Bombardier's Business Aircraft Training network which basically, it gives us nearly 6,000 airplanes out there to fuel.
Also the fact that we've been working on our effectiveness and our cost structure. You can well imagine that we don't necessarily have to have all that utilization come back because our breakeven points, we've been working on that and are better than they were. That was your question. Of course, from a cash point of view, they're much lower than those numbers because the largest part of the costs are not in the training network or barely depreciation on the assets themselves, which of course is non-cash. Sonya, I'll just leave it over to you at this point to-
I'll just, I guess, maybe tag on to the breakeven part of Fadi's question. As you know, the training business is a higher fixed cost business. Two of the biggest costs are the instructor base, which is scalable up or down because we have a base of contingent instructors. That helps on the cost structure. Of course, like Marc just mentioned, non-cash depreciation is one of the larger expenses. We've taken measures to size cost to the new volume, and we continue to review cost management on that front. The last black swan event that we saw in the financial crisis, utilization went down to the low 60s, and we still generated double-digit margins and cash generation. This pandemic is much worse.
What's key to highlight is, like Marc said, we don't have to necessarily go back to the same levels to be back to very healthy levels. Even most importantly, that the utilization could be at quite low levels for this business model to be cash positive. On the product side of the business, it is a bit more balanced between fixed and variable costs, and we have the ability to adjust demand and production levels with the variations in our backlog.
The last thing I'll say, maybe I think what will probably drive things, Fadi, is I'm pretty sure that there'll be a lot of pent-up demand, and that pent-up demand will probably initially towards narrow-body aircraft, because that's the way I think the industry will probably move, at least in the short- to- medium term following the pandemic. You'll know that a great majority of the assets in our training network are geared towards narrow body. I think that that could be disproportionately better for us as the recovery occurs.
Okay. Just one clarification. I realize that a lot of the costs are non-cash costs in the training centers, I guess. At this 25%-30%, is the business cash flow neutral? Like on a cash flow basis, cash flow neutral or cash flow positive? Can it operate at a cash flow neutral or positive at this 25%-30%?
What I'll say is, like I mentioned, we can be cash flow neutral and positive at very low levels of utilization. We won't necessarily share the ranges, but at relatively low levels. As you can imagine, at 60%, we were still in double-digit SOI territory and definitely cash positive. I think you can infer that at much lower levels, we could be cash neutral.
The other thing I'll say, Fadi.
Okay
is that if we thought that we'd stay at that level, we obviously would adjust. Because our training centers and our training footprint has made any assumption of much higher training demand, which as I mentioned, we fully expect to come back. Even today, when we look at 25%-30%, I mean, some training centers are operating much higher than that. It depends where you are. I mean, some training centers are closed. That's the fact is when I talk about 25%-30%, I'm factoring in there some are at zero. Basically, we factored all of that, those training centers come back online, and our expectation is, in large part, those training centers should be back online in June. The ability once that opens up, obviously, we're going to materially move up.
I think although it'd be hard to make money at this level, 25%, 30%, we're not going to stay there.
Okay. One clarification, Sonya, I think in your comment talking about the free cash flow in the H1 of the year being negative, and then you mentioned that working capital is seasonally negative. Are you saying free cash flow negative before working capital in the H1 , and ultimately you have the seasonal working capital issue that you have to deal with as well?
In the free cash flow guidance that we're giving, I include the impact of non-cash working capital. What we're seeing is, as Marc just described, the impact on the operations and disruptions. That will drive negative free cash flow, but that's including what we see as some slower collections and some pressure on the non-cash working capital. On the civil side, solid collections continue on the defense side. In fact, many governments are actually accelerating collections as support measures. Of course, we've put in extensive measures to monitor and manage the working capital closely and measures on inventory and suppliers and such. As we work through this period, we've obviously implemented the cost reductions and cash preservation actions to size to the lower volume and reduce the level of expenditures.
To the guidance that we've given on CapEx, which includes growth and maintenance, that we expect to spend guiding to about CAD 50 million for the H1 of this year. That's a third of what we spent last year, as well as reducing the R&D and suspending the dividends. Ultimately, it's the combination of all that within our regular free cash flow definition. We expect that to inflect positively as the markets reopen, and so on, in the H2 of the year.
Okay. I promise this is my last question, but I want to go back to the comments you made, Marc, about you don't need to go back to pre-COVID-19 to get the profitability to improve again. If I look at your aviation side, you had CAD 2.2 billion of revenue, you have CAD 480 million of operating income for the last 12 months. Do we need to see passenger traffic return to 2019 level to see the scope of this business to go back to that last 12 months kind of levels as we move forward? Are there levers that you think could make you get to those profit levels, even with airlines that are 75% the size of what they used to be?
I think I'll start the comments there, because I don't want to give in to providing guidance when I said I wouldn't. I think what I tell you, I fully expect air travel to come back and go back to what I said at the beginning. People want to travel. That's not going to change. We're talking about timing now. We're talking about time. You pick your time, but my own guess is about two years, okay? Before it gets back to levels we've seen before. Be that whatever it is, you pick whatever. If you think it's going to be later than that, it will get back to those levels, and I think we will do well, as demonstrated. I think that if you looked at things that were coming out of this crisis, you learn from everyone, right?
First and foremost, go back to training as a regulator. That basically ensures the perennity of the business model itself. Our customers out there, the whole growth that we've had in large part over the past few years has been to convince customers to outsource, in whole or in part, their training operations to us. You can well imagine that we think because of our capability, because of the service that we provide, because of the unique insights that we can derive for our customers, and the cost benefits that we can provide to our customers. You can well imagine that we are already having conversations with people to be able to gather more market share in the training itself, in both civil and business aircraft. I think that will help.
The other thing that will help is that, again, you learn lessons out of this, and you can see we're already operating as we've been forced to operate in a different environment. You see. You see, well, how can we maintain some of the cost savings that we see now that are forced upon us, obviously, but we're being forced to innovate in how we deliver services to our customers. You can expect that we have a very strong initiative underway to make a lot of those cost-saving measures structural, so we can benefit from them. We don't have to have all that revenue come back to be able to derive profits. Of course, if we do rise back to, and we eventually will, back to the airline traffic levels that we've seen in the past, well, we'll disproportionately benefit from that.
Last thing I would tell you is business aircraft. Half our business is business aircraft.
Right.
To that end, I'm bullish personally. We do see opposite forces at play, because business aviation is historically correlated to GDP and U.S. corporate profits. Obviously, that's probably going to be trending down. To me, business air travel may become preferred for business continuity, health, and safety reasons. Less frequency of airline traffic into airports other than hubs. Of course, a bit early to tell, but we're watching this carefully.
Great. Appreciate it. Thank you.
Thank you.
Our next question comes from the line of Konark Gupta with Scotiabank. You may proceed with your question.
Thanks, Anna. Good afternoon, everyone.
Hi.
Hi. Just wanted to clarify to the last question on utilization. You mentioned 20% for April, 25%-30% today. Are those utilization numbers based on the centers that are open, or they include the ones that are closed as well?
They include them all. Every.
Okay. It's 0% for, obviously, the closed ones, and then there's some lower utilization for the ones that are open.
Yes.
That makes sense. Thanks. Yeah, my first question is on the recovery. If you look at what Airbus, Boeing, and some of the bigger airlines have suggested, they are anticipating a recovery in the market or their travel demand from anywhere from three-five years. Now, if you don't need, let's say, as much or as many training centers and manufacturing capacity over the next three years or five years, whenever this recovery shape takes place, would you anticipate removing or suspending some of the capacity for longer or permanently?
I think it's too early to tell, as I was saying at the outset, if we saw structural changes that are going to last for a long time, then we would adapt. We've proven in the past that we've adapted. Don't forget that we're very adept at being able to move assets around in our training network. That helps us out because for the obvious reasons that we just mentioned. Look, if that happened, we would adapt our structure. I think inherently a lot of our costs in our training center network are variable already, so that will help us out going forward as well. As I said before, I personally believe that the air traffic will recover again. Question time.
Right. Okay. That makes sense. On free cash flow, I think maybe it's for Sonya, probably more. I understand, like, the free cash flow you guys define is after maintenance CapEx, but before growth CapEx. Just wanted to make sure, when you say free cash positive in H2 , do you anticipate any significant growth CapEx number there? Would you expect the free cash to be positive even after netting out that growth CapEx?
Well, I think right now what we'll guide to is that we expect it to inflect positive as the market opens up. We've provided a CAD 50 million guidance on the CapEx for the H1 , and really the H2 will be a measure of the level of recovery and free cash flow performance that we see. Growth CapEx is inherently discretionary and ultimately is deployed if there are growth opportunities, right? As the market conditions evolve and develop, we'll take a look at it as it is. If growth opportunities are not there, we won't deploy a lot more CapEx. If there are, we'll adapt accordingly, right? Ultimately, right now, CAD 50 million for the H1 of the year, and then we'll really re-baseline as we see how the H1 of the year goes in terms of cash flow and capacity requirements.
It's kind of fair to assume that there's going to be minimal or no growth CapEx in the H1 , right? I mean, you already have a lot of capacity.
That's right. There still will be some. It's a balance. There'll be some maintenance and there's some CapEx that we've got to our own opportunities. It will be pretty low. Yes, you're right.
I was going to say that if there is growth CapEx, it will be because we have very strong customer demand for that.
Of course. There's an inherent demand
any asset that we put, obviously.
Yeah.
Right. No, that makes sense. Very last one for me, if I can squeeze one. Obviously, you're not giving guidance, I understand, but just to kind of have the expectations right in the marketplace. Can you at least suggest what kind of revenue trends or segment operating income trends have you seen so far in this quarter based on the utilization numbers that you gave us? We don't obviously see how many simulators that you deliver and then what kind of demand environment you're seeing at this point. If you can suggest what kind of decline rates are you seeing at least directionally, that'll be great. Thanks.
No, well, we won't go into that for the reasons I talked about. There's too much in flux right now to be able to answer that question in any degree of certainty one way or another. There's just too many moving parts, and the way forward, I think it will define itself a lot better in the upcoming weeks and months.
Okay. That's fair. Thank you so much.
Thank you.
Our next question comes from the line of Steve Arthur from RBC Capital Markets. You may proceed.
Great. Thank you. Just a couple of longer-term items. First, following up on civil margins. They were very high in the quarter. I don't think I've ever seen them near 25%. Just wondering if there's any more color you can offer on what drove that function higher. In particular, were there any one-time items in there? Or as we look out two, three, four years of a longer term, were some of the factors that drove the Q4 levels persistent and things that should indicate longer-term capabilities for that segment?
Well, I can start, and Marc, if you want to jump in also. Really, for this quarter, the 25% is a result of the mix. We had a higher proportion of business jets, which is at the higher level of our civil margins. Also on the product side, the revenue was a little lower than Q4 because we had less deliveries than in Q4. You'll remember there was a big ramp-up last year at the time. Improved program mix drove higher SOI contribution on that front. Really the mix on the programs on the product side and also a higher proportion of the business jets, which has higher margins. For the year, what that gave us is a 22% margin overall. I think a great margin and really the results show what's achievable at steady state in a healthy environment.
Frankly, that in itself had impacts from COVID-19 pandemic in March. Would've been quite a bit better had there not been this pandemic and crisis.
I guess just following up on that. You commented earlier about, in the press release and in the discussion, further opportunities for outsourcing with the airlines. I realize obviously you can't get into specific discussions, but if you could characterize your discussions there relative to, say, six months ago, the number of those conversations that are going on, the nature of them, the urgency of the customers looking for solutions here.
Well, I think that I won't comment on the urgency because I don't like to comment about our customers, but definitely there's more conversations going on. Materially more.
Okay. I guess just final one. With the healthcare situation, in particular, the opportunities there with the ventilators, so amazing work to do what your team has done already, is this something that, in the short term was the right thing to do and you've dealt with it, to support the emergency situation, or is this a longer-term opportunity for CAE Healthcare?
I think we started off from doing the right thing, humanitarian effort for sure. We thought that, the notion was that, with the expertise that we have in CAE Healthcare specifically, the fact that we're in the business of training people on intubation, that kind of thing, using those machines. We have a pretty good knowledge of those particular devices. Then you dovetails with the great systems engineering and innovation capability at CAE and all the skills that we have in electronics and software, in manufacturing. It was just an interesting combination of all those things together to say, "Hey, we can pull this off." I've been very impressed of what we've been able to do.
I'm not surprised because I knew we could do it, but the speed at which we do it, and I think what I would emphasize is on this ventilator, we haven't undertaken a design from someone else that we built to print, that kind of thing. We designed from scratch a new device that's going to be used in ICUs on the most critically ill COVID-19 patients or anybody else that would need a ventilator. I've been very impressed, and so have the people that are healthcare professionals looking at our device. From that point of view, I mean, we haven't built it, if you like, as a device with a cost structure to be competitive in the market, because for obvious reasons, the speed is of the essence here. The Government of Canada gave us a contract for 10,000 and said, "Full speed ahead.
Get that done." That's how we're operating. What I would tell you is, look, to me, nothing's off the table. We'll take a good look at this as we're executing this contract. If this is an area that we could further develop, to be able to provide self-sufficiency to Canada, to Quebec, or any other reason like that, or could we build it in as a solution that we have as part of emergency response that we provide around the world, we might do that. Nothing's off the table, I would tell you. We always look at new ideas, who knows, this could be one. At the moment, we're building it. The delivery is 10,000 units.
Great. Thank you.
Our next question comes from the line of Kevin Chiang with CIBC. You may proceed with your question.
Hi. Good afternoon, everybody. Maybe I'll start off with an earlier remark you made, Marc, about seeing opportunities, and you've brought in a new member of the executive team there, Heidi Wood. I'd be interested in knowing what you think about how you see the competitive environment maybe changing over the next few years here. If memory serves me correct, I think you had a number of aerospace OEMs look to enter the field last time when there was some disruption around defense spending, such as Lockheed Martin looking again into this space. Do you see increasing competitive pressure potentially from some of your more nascent competitors who might see their core business shrinking and maybe looking at training or manufacturing full-flight simulators as maybe a way to offset some of that other pressure?
Look, we'll see. I don't typically spend a lot of time looking in the rearview mirror, if you like, at competitors, not to self-righteous on that, but we focus on our customers. We focus on delighting our customers and staying very close, to their needs and where they're going, and to stay in lockstep with them in providing the product or service we do. As you know, we're a pure play, and because of that, we've been able to establish a commanding market share in every one of our segments. We do a lot to make sure we maintain that right. I talked about delighting our customers. I talked about the successful amount of R&D that we do on moving into using digital and AI to differentiate our solutions. Look, I won't comment on what the competitors are doing.
I don't expect a higher level, a higher competitive environment, more stringent than it was. If anything, I think in this kind of crisis, I dare say that customers will remember those that were there when they needed us most, and CAE is there. Throughout this pandemic, we've been there to service our customers in pretty tough situations where our personnel were on site, delivering because we're an essential service. As I said before, this is a regulated market, so the industry needs us to be around and servicing them either for simulators or providing training. I'm talking about civil now, but or simulators or training in order to be able to maintain their flying operations. We're critical to that. I think that's what customers will look at more, and we provide them a service that is by design, cost-effective in the market.
I think we'll continue to play our game, and I think we'll continue to win.
That's great color. Maybe just one more from me here, maybe this is for Sonya. For this fiscal year 2021, when I look at your contractual obligations that you've laid out in your MD&A, about half of that is for purchase commitments, just over CAD 200 million. Just wonder how much flexibility you have there in the event that some of your product revenue maybe gets deferred, as you mentioned. You are seeing some deferrals or cancellations. Do you have flexibility to adjust that purchase commitment for materials also lower to reflect the fluidity in that revenue line? Or is that CAD 200 million pretty much a fixed cost for this year?
No. That's a purchase commitment and other commitments that we've made with suppliers and other stakeholders. These are key suppliers in our supply chain. These commitments have a wider term. Obviously, we take our best view in terms of the time commitments, and that's what's shown in the note. There is some flexibility should there be deferrals or elements on the timing of our execution of our backlog, then there is flexibility and partnership with our supply chain.
Perfect. That's it for me. Thank you very much.
Thanks.
As a reminder to register for an audio question, please press the one followed by the four on your telephone keypad. Our next question comes from the line of Benoit Poirier with the Desjardins Capital Markets. You may proceed with your question.
Good afternoon, everyone. Marc, just if we look in the longer-term pilot shortage has been a strong rationale for training requirement. We've been talking about the population of 360,000 pilots, demand for over 300,000 pilots over the next 10 years. In light of the massive layoffs we see from some airlines, how would you reconcile the pilot shortage and especially that IATA forecasts to revisit the pre-crisis level somewhere in 2023? Thanks.
Well, I think the first thing I would say, Benoit, is that pilot shortage has never been a strong factor in the revenue numbers and the growth of CAE itself. What drives our training business is the active flying by airlines themselves and the active fleet of pilots that they have. Where we have an exposure to pilot training, i.e., making pilots going from somebody that doesn't have a license to become an airline pilot, is obviously in our flight training organization, our FTO network. We have a network of schools, the largest one in Phoenix, for example. I would tell you that those are operating. Those haven't missed a beat since the beginning of this pandemic. We've continued flying. We've had to shut down and do virtual class training, but in terms of the flying activity, that hasn't stopped.
Now looking at future demand for new pilots to be trained, obviously we're going to look at that very closely because the factors that you just mentioned. I think it's important to note that CAE, by design, has never been after having a very strong proportion of the market in the FTO network. We never sized our operation to be anywhere near to be able to meet the capacity needs and the pilot shortage. The contracts that we have are directly with airlines. So far what we've seen is that the airlines that we've partnered with, if anything, have reaffirmed the contracts they have with us. It takes them a couple of years to form a new pilot.
I think, look, we're going to have to look at this in detail, but I think the biggest thing I would say is it's not a primary driver for revenues in the civil business or earnings.
Okay. That's very good color. When we look at civil margin, obviously, you don't want to provide any guidance here. When we look back at fiscal 2004, fiscal 2005, fiscal 2008, fiscal 2009, how should we be looking at the current situation and your ability to probably get margins similar to the previous levels? Would it be fair to say that this pandemic is different than the last two downturns we got, even if your mix is more geared towards services?
Well, I think, look, nothing compares with this pandemic. This is the worst that anyone's ever seen. I think you can derive some lessons from those, but I think the steps that we've taken to, first of all, control our cost, control our liquidity are the right ones to give you the ample liquidity under, to me, any kind of scenario might want to look at that. In our planning, in the cuts we've made, we've assumed something actually worse than actually we're seeing right now in terms of, for example, the day of sales outstanding on payments as just an example. Look, as I said before, we don't need all that revenue to come back to do very well.
I think the bundled solutions that we have, both simulators and training, I fully expect simulator sales themselves to be much lower because there's going to be much lower deliveries of aircraft. Training, however, we'll have to see. As I said, I think business aviation could be a toss-up. We'll see. Whether it be higher or lower, depending on which wins. Is it corporate profits or the fact that people need to move around and the perceived way of moving around safely and effectively because of limited opportunities on commercial aircraft to get there and back in a reasonable amount of time is business aviation? I think that will be a factor.
Again, we're going to be adapting our costs to continue to be efficient and be able to get some structural cost savings out of this, which means that we don't have to get all the revenue back in order to get earnings back to a reasonable level.
Okay. That's great. Maybe one question for Sonya. From the liquidity standpoint, you've been able to bolster your balance sheet with about CAD 2 billion of liquidity. When we look at your net debt EBITDA, where would you expect the ratio to peak at going through the next few quarter? Also could you talk a little bit about the free cash flow expectation for the H1 ? How much is coming from working capital versus margin? What is driving most of the decline? Thank you.
Yeah. The level of net debt we expect will probably increase over the year as there's cash usage or revolving usage in the near term, and it'll follow what we expect with the negative free cash flow in the H1 , and then inflect positively. As net debt increases a bit, and as we've discussed, there will be some operational impact, and negative financial impact. We expect EBITDA to be lower in the first half as well. You'll see those ratios increase, but we're still, I think, in very healthy territories and well below any covenants that we have. In terms of the free cash flow, we'll speak to it directionally. I think it will be a combination of both. There will be the impact from lower cash from ops because of the disturbances on operations.
We see a higher investment on the non-cash working capital. We usually have one in the H1 . I do expect it to be higher than usual. That'll come mostly from AR. On that front, our DSO, days sales outstanding, had been decreasing nicely quarter-over-quarter, and we saw an uptick, and we do expect that to slow a little bit. In terms of the AR and collections, you got to look at it by segments and products and services. On the sim side, customers are mostly governments, so of course lower risk, and frankly, as I mentioned, governments are accelerating payments. On the civil side, the simulator orders are funded throughout production with progress payments. That gives us a measure of security in the orders and the receivables.
On the training side, terms are generally 30-60 days, so we don't have significant concentrate exposure to AR balance of any one airline. Customers are asking for some extended terms, and we're looking at each situation case by case and incorporating this as part of our working capital assumptions and scenarios. We have deep relationships with all of these customers and work very closely with them through some past black swan events, as we do today. We provide a critical service to the airlines, which obviously can impact the continuity of their operations. This means that training is usually prioritized. Realistically, I think we'll see a bit of a higher balance on the AR side.
Obviously, we are working on the inventory side, being very, I think, judicious on any inventory efficiencies, and much stricter management on the inventory and obviously working with suppliers. You saw in the liquidity elements, we also have shored up our AR factoring program where we can sell some of our AR, and that just increased from $300- $400 million U.S. also. I think a combination of those factors will keep the non-cash working capital as strictly and monitoring it very tightly. Realistically, we do expect it to grow a little bit.
Okay. That's great, color. Thanks very much for the time.
Thank you.
Our next question comes from the line of Cameron Doerksen with National Bank Financial. You may proceed.
Thanks. Good afternoon. Just a question on the full-flight simulator business. I'm just wondering if, when we think about Q1 with all the travel restrictions, what is your ability to actually, I guess, deliver a simulator or have customers even travel to accept or for your own staff to go and install a simulator? Is that something that we actually need to see travel restrictions removed before we're even able to do that? Or are there some special ability for them to do that, or they have approval to do that?
It depends. Mostly, we operate as an essential service around the globe. That provides us the ability to, in most places, be able to conduct the work. We obviously look at things from the safety of our employees. That's our first priority. If we can satisfy ourselves that it's a safe situation that they can operate within a safe manner for themselves and their customers, then by and large, we can get it done.
Okay. Maybe just one second one for me. Just as we think about maybe the next couple of quarters, I've seen, obviously, a lot of airlines furloughing pilots and taking entire fleet types out, and usually when that happens, you see a lot of pilots having to change the type of aircraft that they fly, which presumably would lead to a much larger training event for them. Do you see this as somewhat of an offset if, even if the pilot population is much lower, there could potentially be some much larger training events for some of these pilots that will act as an offset? Is that your view?
Yes, absolutely. That coupled with the pent-up demand, that we have 60% of the world's fleet on the ground. That's not going to be something that's going to be sustained, obviously. I think a proportion of the world's fleet will stay grounded for quite a while, but certainly not 60%. As those airplanes start being brought up, there's going to be pilots need to fly them. The pent-up demand of training, number one, and the fact that, as you just talked about, we've talked about that many times in the past, we refer to as churn in the pilot population. I certainly would expect that you will see retirements out of that. When people see the opportunity, I think airlines in some cases are encouraging people to retire, so that because of seniority rules, that kind of sends people bumping different types of aircrafts.
Certainly, the amount of training demand will not be one-to-one with traffic patterns or delivery patterns at the airlines, for sure, for a while.
Okay, that's great. Thanks very much.
Our next question comes from the line of Tim James with TD Securities. You may proceed with your question.
Thank you. Just very quickly, first of all, Marc, is it correct to assume that the 25%-30% current utilization of the SIM network, that's all sort of recurrent training?
No. There's initials going on as well, but primarily, I would say recurrent right now, but if you think about business aircraft, we're doing a lot of initials right now.
Oh, okay. Great. I guess just kind of along that line of thought, are you getting a sense at this point from what your big commercial customers are telling you in terms of how they're planning out their recurrent training? Do you get the sense they're looking out to the end of this year, maybe it's early 2021, and they're starting to try and estimate what capacity they will have and then determine their pilot requirements on that basis? They're kind of looking past this trough and making sure that they've got enough pilots that are staying current with their training, even if those pilots are not being utilized for, say, the next two or three months. Are you getting a sense at all about that from your customers?
Well, again, I don't want to get into too much of what our customers are saying, because you can read what they're saying, and they report this themselves. I can just talk about our own operations. Yes, we have dialogue just by the very nature that we have relationships one way or another with the majority of the world's airlines. You expect what we say about the report is informed by those discussions as well as other measures, like when I talked about the IATA forecast itself, and other means of input that we get with regards to the business aviation fleet, what fractionals are doing, that kind of thing.
I think you could well imagine because of what I gave the previous answer with regards to the amount of training that has to occur to maintain a pilot current, to be able to operate an aircraft, a commercial aircraft, and the fact that there's going to be a lot of, if they retire fleets or they move into different fleets, they retire pilots, that there's going to be a lot of training events being caused by those moves. You can imagine that the airlines are spending a lot of time looking at that. Are they looking at next year? I think, yeah, next year in a lot of cases, they'd have as little visibility as we have and be able to provide that. I wouldn't go as far as to give you an opinion as that later than a few months going forward.
Okay. Those are the only questions I had. Thank you.
Thank you.
Operator, I think we've gone over the allotted time, but I want to thank everyone for participating on the call today and remind you that a transcript of the call can be found on our website. Before we conclude, we'll open the lines to see if there are any questions from members of the media.
Once again, ladies and gentlemen, as a reminder to register for an audio question, please press the one followed by the four on your telephone. Our first question from the media is from Julien Arsenault with La Presse. You may proceed.
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Ok, operator. I think we'll conclude the call now. Again, thanks to everyone from the investment community and media for joining us and remind you that a transcript of the call can be found on CAE's website. Thank you.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.